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Retailers in need of therapy

Australia’s beleaguered retailers just can’t catch a break as yet another international store chain opened its doors in Pitt Street this week. Sephora is the latest, and probably not the last retailer to find the landscape enticing enough to set up shop here.

Sephora, Gap, Zara, Uniqlo, H&M, Topshop and Williams-Sonoma are thinking there’s retail market share to be had in Australia, so there’s little wonder why the domestic retailers are finding life so tough.

It wasn’t so long ago that public enemy number one for retailers was the internet and the ease with which customers could source lower priced goods from overseas and avoid paying GST at the same time for stuff under $1,000.

Belatedly, retailers began to catch up with fancy strategies like omni-retailing to plug the gaping hole in their own online capabilities. The reality is that online spending in Australia accounts for about 6% to 7% of total retail sales and while that figure is growing, it is still substantially less material to underlying profits than the bricks and mortar in the main street and shopping centres.

But it’s not just the increased competition that is weighing on retailers’ financial performance. Consumer confidence has vaporised at just the moment that discretionary consumer spending needs to be improving. The Christmas season accounts for a very large proportion of most retailers’ sales and chews up similarly large amounts of working capital to have sufficient stock on hand.

If the volume of sales does not emerge, retailers are forced to act quickly to remove the potential excess stock on their balance sheet and in their warehouses.

Approaching the last couple of weeks ahead of Christmas 2014, the signs don’t look promising.

Promotional activity, otherwise known as discounting, will almost certainly feature again this year and it will be a case of who blinks first amongst the competition.

Despite the wealth effect of lower interest rates on the housing market, consumers are still counting the pennies and even the supermarkets are wondering where their top line sales growth has gone.

Plummeting oil prices should eventually mean cheaper petrol but consumers aren’t seeing any real difference in disposable income yet.

Unemployment at 6.3% is rising and probably creating some of the fear amongst consumers about profligate spending. Wage growth has barely featured in economic bulletins let alone the nightly television news.

Of the listed retailers, only Domino’s Pizza and Premier Investments have enjoyed a strong year in terms of share price performance. Elsewhere, the news is generally bad with the value of companies such as Myer (-47% year-to-date), JB Hi-Fi (-28%), Super Retail Group (-47%) and The Reject Shop (-63%) giving the mining stocks a run for the wooden spoon this year.

With such a big decline in the market value of Australia’s main retail stocks, the temptation for more takeover activity might be on the radar after David Jones was engulfed by Woolworths of South Africa earlier this year.

The secondary effects of weak consumer spending are evident in retail advertising which has emaciated television network earnings this year as well as newspapers and every other media except online advertising.

Usually, the launch of a new Apple device would have a solid contribution to electronics sales generally but even this has struggled to make headlines.

At this point, it’s looking like a bleak Christmas for retailers and kids might be forgiven for panicking at the sight of an ankle sock on the mantelpiece.

Investors might also be waiting for some New Year’s bargain sales of retail stocks but even then it will pay to be a little discerning.

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